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Stablecoin: What you need to know before investing

stablecoin
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The leading cryptocurrency’s value, Bitcoin, has fallen by more than 30% this year and halved from its peak over the last year. However, looking beyond the volatile Bitcoins, Ethereum, and other virtual currencies, you may find that another kind of digital asset called stablecoin is relatively, as its name denotes, stable. Despite some explosive moments, major stablecoins like USDC and Tether see their values close to USD one owing to their pegged-to-dollar nature.

After the tsunami-style crash, worldwide regulators must increase the scrutiny over cryptocurrencies and related assets. Moreover, new rules and regulations are under review to better monitor crypto issuers and protect investors and consumers. 

Virtual currencies inevitably seem to be a new form of monetary medium besides hard money or commodities. Stablecoins, as a class of cryptocurrencies, can be a rising star and pillar of tomorrow’s financial technology for widespread usage around the world. It is not bad news that well-intent regulations may propel the industry to move a step forward and safeguard investors and customers at the same time.

What are Stablecoins?

Stablecoins are cryptocurrencies linking their values to other assets. The crypto asset can keep the price steady by matching it with other assets like US dollars or precious commodities. A Tether investor can exchange one Tether for one US dollar. USDT (Tether) and USDC are examples of fixing their value to the US dollar or dollar-equivalent assets.  Read more on the differences between USDC vs USDT.

Virtual money without a peg always has a volatile history. Bitcoins have undergone a roller-coaster time from the peak of almost USD 50,000 to about USD 25,000 over the past year. Ethereum has lost over 40% since the year’s beginning and more than 50% from its peak for the past year.

The 2 primary tokens have dominated the cryptocurrency market. Like other cryptocurrencies, most stablecoins operate on the Ethereum platform developed by Blockchain technology. Investors can embed programmable executive codes on the system, so specific actions, e.g., “sale or purchase,” execute automatically when pre-set conditions are met. The instructions, called “ the social contract,” are why stablecoin creators prefer to use the Ethereum platform for business.

Besides Ethereum, stablecoins, like universal coins, work on many crypto networks. The digital assets bridge and increase inter-platform flows of crypto assets. USDT (Tether) is also popular on Algorand, Bitcoin Cash, EOS, OMG Networks, Tron, Solana. USDC is also active on the Algorand, Solana, Stellar, and Tron.

What is Blockchain technology?

Blockchain is an advanced digital technology recording information in an electronic database. Like a ledger, essential data like transactions and asset information are recorded chronologically in the system.

Blockchain stores information in sets, known as blocks. The blocks can keep a certain amount of data. When a block finishes filling up data, another block is in place to store more information. And subsequently, a new block links to the previous one.

What distinguishes it from other databases is the blocks storing information. No one can change the data once they are encrypted. Besides, a timestamp will accompany the information and makes it permanent.

The advantages of using blockchain technology for cryptocurrency are :

  • It is secure and transparent. Data are unalterable, and they are open to participants involved.
  • A safe digital ledge format: It is a decentralized system showing information in a timely sequence.

3d cryptocurrency rendering design

How do Stablecoins work?

Before proceeding, you might find it helpful to learn some terms about the background.

About Cryptocurrency

Cryptocurrency is a digital currency based on computer networks developed by blockchain technology. 

Cryptocurrency’s features:

  • The digital asset is secure because it uses a crypto calligraphy technique using an encryption algorithm and safeguarding entries.
  • Once encrypted, the records on the network are not changeable or erasable.
  • The digital system is a decentralized system spreading across a network of computers. Therefore, it is beyond Government’s monitoring and surveillance. In other words, the data existing in the system are anonymous and out of the government’s eyes.
  • They can be a means of transferring money, albeit quicker than traditional remittances. Besides, The cost of money transfer is much lower than others. Due to its decentralized nature, the probability of all-out failure is low, and the impact on the whole system is minimal.
  • Experts predict wide use of cryptocurrency will disrupt conventional ways people deal with business, especially in finance and legal aspects.

You can obtain cryptocurrency by mining or buying from a crypto exchange

Mining is the process of producing a new crypto token. Bitcoins use the method to increase the crypto supply. Bitcoin miners use complex hardware to solve mathematical problems, and the first comer will get a new token. The mining process involves significant resources like time, electricity, and effort.

Another simple way is to buy digital coins from crypto exchanges. You need a digital wallet and open an account with an exchange. Continuous price quotes are available 24 hours a day so that you may get access to the electronic asset anytime.

The buying process varies depending on requirements from coin types and issuers. You should get to know more before making any decision. However, an exchange is the most convenient and accessible venue to buy and invest in digital assets, irrespective of type.

Ethereum

Digital assets are circulating on the computer networks created by blockchain technology. A network is a platform where investors or owners buy and sell digital tokens and trade. Ethereum is one of the platforms for hosting crypto assets besides its native currency: Ether or Ethereum.

Several takeaways from Ethereum:

  • Besides bitcoins, Ethereum is the second-largest blockchain platform for hosting digital currencies. 
  • Ether or Ethereum (ETH) is its native currency and has the second-largest market cap next to bitcoin.
  • Besides Ether, it also embraces other cryptocurrencies like the stablecoins, such as USDC and USDT, because it supports and facilitates operating protocols like “social contracts.”
  • Its open-source infrastructure offers a favorite environment for other technology creations and advances in “decentralized and disruptive finance.”
  • Ethereum also hosts many NFTs (Non-Fungible Tokens) and its business activities. NFTs are digital artwork created as a collectible for sale and purchases in a virtual world. The notable examples are Bored Ape Yacht Club, CroptoPunkts, and Cool Cats.

Ethereum is a platform for most major stablecoins because the infrastructure offers multi-program codes as conditions to be executed and the sale and purchases. Buyers, sellers, or investors alike can create personalized terms through the “social contracts” to make business deals. That’s why the stablecoins, pegged with other assets, use Ethereum for their operating platform.

Besides hosting cryptocurrencies and NFTs, Ethereum has worked with technology giants in promoting businesses. Advanced Micro Devices (AMD) has partnered with Concensys (Ethereum founder) to promote the former’s data centers based on the Ethereum platform. Microsoft has used Ethereum’s technology in building its Azure’s cloud services.

More services providers use Ethereum technology to upgrade services like WEB 3.0, gaming, and virtual reality (VR).

Stablecoins

“Stable” is the theme of what digital currency is all about. As cryptocurrencies have volatile pricing history, a digital asset is in place to reduce its fluctuating nature for one of its purposes. Stablecoins create assets to back up their value. For example, Tether (USDT) has a value benchmark of 1:1. Investors or owners can buy one Tether for one US dollar or vice versa. 

While other cryptos like bitcoins and ether are experiencing an avalanche in prices, stablecoins can provide a safe haven for a value parking place for investors. The recent selloffs in cryptocurrency markets do not make stablecoins a safe island in a turbulent sea. Due to its complex peg formula, a stablecoin “Terra” loses crown jewels by suffering its peg value. Main stablecoins can still hold positions as a stable currency in a virtual world.

Like banks, you can earn interest in stablecoins by depositing the digital currency with a financial institution. The institution lends your stablecoins and returns part of the profits as deposit interest to you.

Takeaways for Stablecoins:

  • The value of Stablecoins is pegged to assets like US dollars and commodities. Every digital coin is a legal promise for a part of a backup asset available for exchange.
  • Stablecoins are global; you can instantly send or receive stablecoins through the internet. 
  • The stable currencies are interchangeable. You can swap one stablecoin for another one if their values are equivalent.
  • Stablecoins are secure. With encrypted crypto calligraphy technology, stablecoins provide a safe and privacy-protected asset for investors.
  • Due to their general stable nature, stablecoins serve as a conduit for liquidity and asset parking venue to shield from fluctuating crypto markets.

smartphone showing graphy chart ethereum coin

What are the Kinds of Stablecoins?

With advanced technology and the bloom of decentralized finance in recent decades, digital assets have blossomed into a more comprehensive concatenation of products. Stablecoins typically have values backed up by other assets like hard currency, commodities even other cryptocurrencies. Moreover, complex formulas referring to backup assets are in place to determine stablecoin value.

Demands from investors and users have given birth to various digital coins for divergent purposes. 

4 current types of stablecoins are evident concerning the value calculation and asset composition.

1. Fiat-Collateralized Stablecoins

A cryptocurrency creator establishes a backup reserve to determine the value of a digital coin. For example, a Tether is exchangeable for a US dollar. Investors or users can buy one Tether with one US dollar. 

You may see some differences between one dollar in a Tether’s price quote because it may be 1. a short-term issue for the token’s demand and supply, and it may return to equilibrium through trades by both sellers and buyers, or 2. commission or administrative fees.

Besides fiat currencies like the US dollar for fiat-backed stablecoins, commodity-backed stablecoins like precious metals such as gold, silver, and even crude oil are available as backup reserves for stablecoins to enhance owners’ confidence. Nevertheless, most stablecoins calculate their net worth based on the US dollar.

The most popular stablecoins use a hard currency of the US dollar as reserves. They include USDT (Tether), USDC, and BUSD; each coin is convertible into one US dollar and vice versa. Furthermore, the currency issuer is flexible in producing new coins based on supply and demand conditions.

The administrator discloses and updates the reserves regularly. Typically, a third party like an audit firm is responsible for the monitoring to ensure they comply with protocols.

While reserve compositions backing up stablecoins differ on issuers, the primary portfolio allocations for the two USDT and USDC consist of 90% or more in cash and its equivalents. USDT has close to half of its holdings in the US treasury bills and one quarter in commercial paper and certificates of deposit. USDC has 80% of its portfolio in short-term treasury bills and 20% remaining in cash. Both companies regularly update and disclose their portfolios to the public.

2. Crypto-Collateralized Stablecoins

They are stablecoins backed up by another cryptocurrency or a portfolio of digital tokens as an underlying crypto asset class. Yet, the stablecoin creator overcollateralizes its stablecoin pool due to its high volatility nature. For example, a pool of stablecoins worth US 1 billion has a reserve of underlying crypto-assets valued at 1.5 billion US dollars. The over-collateralization ratio varies for stablecoins. The purpose of overcollateralizing stablecoins is to maintain the stability of the currency.

The features of crypto-collateralized stablecoins are:

  • Contrary to the fiat-collateralized digital coins, the crypto-backed stablecoins are wholly decentralized systems without an administrator acting as a central banker and controlling a currency supply. 
  • A “smart contract,” an executable program code, will trigger a birth or deletion of a digital token once a system detects conditions that meet the criteria, like a sale or buy.

Dai (DAI), a crypto-back stablecoin, uses hybrid backup assets of US dollar, Ethereum, and other cryptocurrencies to form a reserve worth 150% equivalent to the stablecoin value. Unlike the fiat-backup portfolio, the reserve composition is more complex, and hard to understand the value determination process. Investors and users may need more effort to understand its underlying asset compositions in calculating its reserve value.

3. Non-Collateralized (Algorithmic) Stablecoins

Don’t be confused with the term! This kind of stablecoins may have asset backup or without. What’s unique is how they control the currency supply to stabilize the price. Combining with or without any reserve asset, the administrator develops an algorithmic method to monitor and do the job of supplying and deleting the currency. Like a central bank, the creator Inputs pre-set formulae to computer programs to keep the value stable.

This type of stablecoins has the feature of using artificial intelligence to control asset prices. Unlike the central bank, the administrator lacks transparent parameters and indicators to do the job; moreover, it lacks sovereign credibility to gain the trust of investors and users in implementing a trustworthy monetary policy.

TerraUSD (UST) is an algorithmic stablecoin operating with computer programs. It claims one UST matches one dollar. Instead of building up a US dollar reserve, the issuer uses computer programs to link the currency to another cryptocurrency Terra (LUNA). On May 11, 2022, a price crash on LUNA (80% fall) led to a landslide in UST by 60%. The peg has broken down within a day!

The complex mechanism used by the algorithmic stablecoins also makes access to investors and users difficult and may prevent it from further use. 

What are Stablecoins Used for?

Stablecoins have many practical applications in real life due to their stable nature as a medium of payments or value storage. Moreover, they can even be alternatives to fiat currency in daily uses.

1. Cross-border payments

The blockchain platforms that stablecoins operate on exist in an internet world. Stablecoins Besides, all transaction information on record is permanent and unerasable in the system. And can act as money transfers and payments for goods and services across international borders.

One of the advantages of using stablecoins for cross-border payments is low fees. Unlike banks, you don’t have to pay charges to intermediaries while you transfer directly to a receiver’s account in an internet world. Payments between a sender and receiver are on an immediate party-to-party basis.

All activities on the blocks are transparent except for the identities of the parties involved. Without an intermediary, data related to a payer and a receiver are anonymous and free from the government’s surveillance. Therefore, using cryptocurrency for money transfers can shorten time instead of banking channels.

2. Crypto investments

Stablecoins act as a shelter or parking place for your cryptocurrencies. If crypto investors need to change from one cryptocurrency to another, like Solana to Ethereum, they should switch from one platform to another due to separate systems. Yet, instead of converting into hard currencies like the US dollars or Euros, investors can convert into stable coins to keep assets steady and await potential investment opportunities. Furthermore, most platforms accept stablecoins like USDT and USDC on their systems, saving costs and effort in changing platforms.

Investors’ activities are anonymous because transactions occur within the virtual world beyond a third party’s reach like a financial institution.

The good news is more and more commercial enterprises are accepting stablecoins for payments. They range from financial institutions to coffee shops and are increasing.

Where can I Buy Stablecoins in Singapore?

Singapore, a regional financial hub, hosts many domestic and foreign crypto exchanges. Investors have plentiful choices in choosing the best one suitable for their needs. The following are the most popular crypto trading platforms for your reference.

Exchanges Description Fees Transaction types
Crypto.com Crypto.com offers more than 100 cryptocurrencies for trade. Investors can earn up to 14.50% by staking their assets. The minimum investment is SGD 1.35. 

Account verification time: 1 week

 

Trading fees: 0.4% for funds up to US 25,000.

0.35% for funds from US 25,000 to US 50,000.

Flexible rates apply after US 50,001

Deposit fee: 3.5% for card transfer

Withdrawal fees: It depends on cryptocurrencies.

SGD and more than 20 currencies
Gemini Exchange Gemini offers 60 cryptocurrencies for trade. It also provides web and app services. The minimum investment is SGD 1.

It has its crypto called “Cryptopedia.” 

Account verification time: 1 day

Trading fee: 0.25% of the trading volume; minimum SGD 1.5

Deposit fee: 3.49% for card transfer

Withdrawal fee: Bank transfer: 0

Cryptocurrency fee: 0 for 10 monthly withdrawals and individual rates apply after that

SGD & more than 8 currencies
Kraken Kraken has plentiful education resources helping people learn about crypto investments. Over 50 types of digital coins are available. Margin leverage can be up 5 times. The minimum investment amount is SGD14

Account verification time: 1 day.

Trading fee: 0.9% of trading value

Withdrawal fee: SGD4 for bank transfer

6 international currencies but excluding SGD
Luno Luno has 6 cryptocurrencies for investments. An education portal, “LunoDiscover,” provides abundant materials to investors. The minimum investment amount is SGD1. Trading fee: 0.75% for all trades

Withdrawal fee: SGD2 for bank transfer

SGD
Zipmex Zipmex has 41 cryptocurrencies available for trades; investors earn up to an 11% bonus on stablecoins. The minimum investment amount is SGD1.  Trading fee: up 0.2% of trading value, 0.3% for bank transfer

Withdrawal fee: 0.3%

SGD & USD

 

How to Buy Stablecoins?

You only need 4 steps to buy stablecoins like USD Coin or USD Tether. The two primary stablecoins with a combined market capitalization of more than 80%). A crypto exchange is a fastest and most convenient way to purchase stablecoins. In addition, you should get some legal documents ready beforehand before the computer.

1. Pinpoint an ideal exchange

You may need to compare the fee structures, range of products, and payment methods to sort out a favor appropriate to your investing style, needs, and customer support requirements. Research is the first step toward investing. 

2. Create an account with an exchange

With avant-garde technology, most exchanges offer a simple and speedy process for opening an account. Follow the “open an account” step and subsequent procedures like “upload identity documents and address proof” and offer your email address for correspondence. Individual institutions may require one day to one week to verify your account, and you should inquire about the details before opening an account.

3. Fund your account

Exchanges have different funding requirements from customers. Yet, the standard methods are bank account transfer, credit and debit card funding, and cryptocurrency transfer. You should understand the charges related to various funding methods.

4. Invest

Create your crypto wallet and start to buy stablecoins.

technology digital asset laptop cryptocurrency

How Stable are Stabelcoins and the Future of the Digital Currency?

If any eye-popping news over the last several weeks about cryptocurrencies occurs, no one will doubt the de-pegging news of TerraUSD (UST). Terra, a so-called stablecoin, had fallen off the cliff and torn its link to the US dollar. It is worth 0.0001 dollar per UST now. You are skeptical that the cryptocurrency market is volatile; even the stablecoins are not immune from the fallout.

It all started with the Luna, from which Terra, an algorithmic stablecoin, calculates its worth for a peg of 1:1 ratio (one terra for one US dollar). 

Yet, Terra’s administrator, the Luna owner, also pegs its worth on Luna. On May 12, Luna’s price, like an avalanche, fell sharply. It also triggered a mass print of Luna by the “smart contract” to maintain the peg to Terra. Unmatched by arbitrage force in the market, TerraUSD (UST) was forced to decouple from the 1-1 peg, leading to USD 0.40 at day’s end.

Cryptocurrency, like other investments, has its high and low times. Self-adjustment and correction may close loopholes and consolidate by eliminating inefficient and problematic processes. However, as a stablecoin investor, you should do the research before investing. The following are essential considerations you should take when purchasing stablecoins.

1. Collateralization

One reason for the collapse in Terra’s peg is the lack of hard currency like the U.S. dollar for backing up the crypto. Once fear creeps in, a stumble for panic exit may cause the system to break down, especially without conventional and trustworthy assets as shields.

Despite this, asset protections like other cryptocurrencies as reserves may help the price stable rather than not. However, when the whole crypto market suffers from depression, many assets are not exempt from mass exodus. Therefore, a crypto-collateralized stablecoin may still suffer from further selloffs of other crypto classes.

2. Peg

You may notice a 100% peg between 1 stablecoin and 1 US dollar as claimed. Temporary differences of a few cents may be due to short-term demand and supply issues. Buying and selling activities will bring it to an equilibrium one-on-one level in a normal condition.

3. Correlation

Some argue that crypto-assets can be an alternative to other volatile investments. Yet, you may find stablecoins linked to commodities and precious metals besides the US dollar. Oil and gold have high volatility histories; you may not expect stablecoins have consistent stability. Even the US dollar, the most steady backup currency, has undergone depreciation in recent decades due to the monetary policy.

4. Crypto central power

Not all stablecoins are decentralized finance. Acting as a central banker, a coin issuer has the absolute power to produce and erase stablecoins when it deems necessary. However, it does not have clear and transparent procedures for its operations and decisions. Furthermore, it lacks the universal credibility of a central banker in implementing policies and, as a consequence, it may lead to efficiency and effectiveness issues.

5. Legislation

The cryptocurrency market has amplified and grown to over USD 1 trillion in the past 5 years. Money streams keep flowing into the market despite the recent retreat, though at a slower pace. Though it is a global market, thus far, few legislations are in place to keep the market in order and monitor corporate operations for the public’s protection.

The US treasury secretary Janet Yellen expresses concerns the industry will pose systemic risks to the financial world and affect the economy. The President of the European Central Bank, Ms. Christine Largarde, has recently criticized cryptocurrencies have no credible economic and financial strength to support investors’ confidence. The governments worldwide are now determined to legislate the industry after the recent crash of TerraUSD and Luna.

In real-life applications, stablecoins can be a medium of money transfer between individuals, corporations, and even countries and make the transactions more secure and faster than conventional financial institutions. To keep the crypto finance in order, the US lawmakers may pass “The Digital Commodity Exchange Act of 2022”, an updated version of a bill initiated in 2020.

The act aims to give the government more power to regulate and monitor the industry. Moreover, the Commodity Futures Trading Commission will have a greater role in overseeing the cryptocurrency industry and its related matters.

Investors and operators will face more dramatic changes in regulations, finance, and customers’ protection in the years to come as the authority aims to put all things in order.

Final Thoughts

Stablecoins, one member of the cryptocurrency market, have had a short history but experienced exponential growth over the past several years. They have developed various kinds like asset-backed, crypto-backed, and algorithmic stablecoins. And USDT (Tether), USDC, and BUSD (Binance) have a combined market cap of over 90%.

Stablecoins can be a speedy and secure money transfer for business and other purposes in real life. Furthermore, they increase investors’ liquidity and currency parking places. Investors and users should keep an eye on the development concerning cryptocurrency regulations.

Key Takeaways

  • Stablecoins serve as a tool for fast and secure money transfers.
  • USDT, USDC, and BUSD are three major stablecoins with a combined value of over 80% of the market share.
  • Stablecoins increase crypto liquidity and acts as a shelter and parking place for digital tokens.
  • Scrutiny and industry regulations are on the increase to protect the public.

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